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3. Consider a household in the two-period consumption-savings model. The household has well-behaved preferences over period-1 and -2 consumption given by u(c1,02), is are con-
3. Consider a household in the two-period consumption-savings model. The household has well-behaved preferences over period-1 and -2 consumption given by u(c1,02), is are con- strained by their period budget constraints, At = (1 + 22)At_1 + Yt Ptct for t = 1, 2. (a) Use the Fisher Equation to transform the period budget constraints into real terms. (HINT: You may convert one period budget constraint directly, say for t = 1, and generalize to the other.) (b) Use your answers from part (a) to derive the Lifetime Budget Constraint (LBC) in real terms. You may assume that 0.2 = 0.0 = 0 for simplicity. (c) Use indifference curve analysis to graphically locate the optimal choice (CI, 0;). Label slopes and intercepts on your graph
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